Picking a Stock (part A)
by
Charles Lamson
Picking Stocks to Evaluate
Before you can evaluate a stock, you need to narrow your choices down from 10,000 or so available stocks. There is no shortage of information on companies; in fact, you may find there is too much.
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The best and fastest way to pick stocks for evaluation is to use a stock-screening service available on the Internet. These tools allow you to set some parameters and narrow the field down to only those stocks that match your "screen."
Many of these services have preset screens that are already set up for you. Others allow you to build your own screens. For example, you can ask the screen to look for companies that have had revenue growth in excess of 15 percent for the past three years and have a market capitalization less than $750 million.
This might give you some potential growth stocks to look at. Morningstar.com has a screening function that will help you focus on the type of company you are looking for and, if you are using morningstar.com categories, allow you to compare this stock to its peers.
There is another screening method that is not nearly so high-tech, but can be just as successful. In his book Alpha Teach Yourself Investing in 24 Hours, Ken Little calls it the "keeping your eyes open" method of screening. As an example, Little relays the following story on page 271:
Years ago when the financial services industry was going through deregulation, a couple of hotshot brokers were trying to figure out how to make a lot of money by picking the winners in a deregulated market.  Meanwhile, a retired schoolteacher amassed a small fortune (for her) by doing the same thing. The difference? While the hotshot brokers were pouring over research reports and annual reports, the retired schoolteacher noticed that deregulation had permitted the placement of automatic teller machines at sites off of the bank's property. She concluded that this was sure to be a popular trend, so she invested in companies that made the ATMs. She correctly saw a change in the way cash was distributed by banks and capitalized on it by not worrying about which banks were going to do well in deregulation, but focusing on a machine they would all want and need. The point is, she kept her eyes open. I am not suggesting you try to figure out what the next ATM phenomenon will be. However, vou can make some educated guesses about which stocks to research using the same method.
Here are some screens to consider:
Invest in What You Know
Are there changes and innovations at your workplace that may indicate potential new markets or other group opportunities? Maybe your competitors are the ones out front. What about suppliers you work with or observe at your work?
Invest in What You Buy
Apply the same principals as when investing in what you know. What are you buying now that you did not buy yesterday? Items and services that simplify your life are going to be increasingly important.
Invest in What a Lot of People Buy
Maybe you prefer Pepsi over Coke, but either way, hundreds of millions of people buy both each day. On the other hand, how many supercomputers are sold each day? Not many.
The point is that products used by the masses are usually better investments than companies making a very specific product with a limited market. In our example above, the schoolteacher picked a product that would penetrate 100 percent of its market.
Whether it is consumables or vital infrastructure products, market leaders and up-and-comers are worthy of your consideration.
*ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 269-272*
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